HSA and Living in California :(

[MajinVegeta]

Good evening everyone,

I just graduated residency and I landed myself a job in California as a K-1 Partner. I just applied for benefits and quickly signed up for an HSA account. However, after doing further research I am now seeing that California Taxes  HSA accounts. Can someone elaborate on these taxes? Does this even make an HSA worth it in California? and for those of you who have an HSA in california how do you invest or maximize the use of it?

Thank you so much

​​​​​​​best,

[stocknoob4111]

CA treats a HSA as a regular taxable brokerage account. Still worth it in my opinion. If you move out of CA later you can then reap the full tax benefits from that point. You're still getting the Federal tax benefit though so keep that in mind.

[MajinVegeta]

CA treats a HSA as a regular taxable brokerage account. Still worth it in my opinion. If you move out of CA later you can then reap the full tax benefits from that point. You're still getting the Federal tax benefit though so keep that in mind.

I see I see....so if it is a brokerage account then "following the boggle head way" I should invest in tax efficient funds aka ETFS, Total Stock Market Index funds...

would I also get Foreign tax credit if using international total index fund then?

[stocknoob4111]

would I also get Foreign tax credit if using international total index fund then?

I don't believe there is any such thing as a "Foreign Tax Credit" under CA tax laws, this is only at the Federal level. I don't live in CA anymore but that is how I recall it. Someone else can confirm this.

Since HSA is fully tax deductible at the Federal level any taxes/credits are not relevant for this account type.

[BogleTaxPro]

California does not have a foreign tax credit.

MajinVegeta, you might want to browse this previous topic: viewtopic.php?p=7418795#p7418795
especially Morgan22's suggestion to use TIPS or a treasury fund since those are state tax-free.

[Impatience]

Good suggestions above. Essentially it’s like any other HSA except you need to be mindful of a hefty state tax I.e. your capital gains are taxed as ordinary income. So avoid an asset allocation in your HSA that involves rebalancing or throwing off unnecessary taxable income. Still very much worth it to maintain the HSA.

[quantAndHold]

Read that other thread. Federal debt is not taxable at the state level, so many of us use the HSA to invest in Treasury bond funds, at least until we retire and our overall state tax rate drops.

[dual]

Preparing tax returns on a California HSA is a pain in the ass. California expects you to report income on your tax return but all brokers that I am aware of do not break down the account income or give you a 1099. Even if the income is, for example, treasury interest and not taxable by the state, you have to report it and then designate it as not taxable. If you buy and sell stock or mutual funds you have to keep track of the basis and enter any gains or losses to your state tax return.

If you move to another state and then withdraw money from your HSA, it is unclear to me whether the new state will tax the withdrawal.

[quantAndHold]

Preparing tax returns on a California HSA is a pain in the ass. California expects you to report income on your tax return but all brokers that I am aware of do not break down the account income or give you a 1099. Even if the income is, for example, treasury interest and not taxable by the state, you have to report it and then designate it as not taxable. If you buy and sell stock or mutual funds you have to keep track of the basis and enter any gains or losses to your state tax return.

If you move to another state and then withdraw money from your HSA, it is unclear to me whether the new state will tax the withdrawal.

My experience is that I get what I need for CA tax reporting in teeny tiny print at the bottom of my last HSA statement for the year. Like 6 point font that I would never be able to read without my glasses.

The thing with treasury interest is that while it might be technically required to report it, in practice, the state is not going to come after you for not reporting something that’s going to net them $0. The only reason I would go to the trouble is if I had a mix of taxable and non-taxable interest.

[muffins14]

Just invest it in treasures. No need to be sad.

You have your other accounts for stocks

[MajinVegeta]

Thank you everyone for the information so far. Extremely helpful!

So for HSA's I guess I should keep a certain amount of the money "liquid" for qualified medical expenses. And the rest of it just invest


?

[quantAndHold]

Thank you everyone for the information so far. Extremely helpful!

So for HSA's I guess I should keep a certain amount of the money "liquid" for qualified medical expenses. And the rest of it just invest


?

If you’re planning on using is immediately for medical expenses, I’d just keep the whole thing in cash. What most young people do, though, is use it as another tax free investment vehicle, and don’t spend any of it until social security age.

[dual]

Quant:

My experience is that I get what I need for CA tax reporting in teeny tiny print at the bottom of my last HSA statement for the year. Like 6 point font that I would never be able to read without my glasses.

Where do you have your HSA? I have not seen that on my Fidelity account.

[moral_hazard]

Thank you everyone for the information so far. Extremely helpful!

So for HSA's I guess I should keep a certain amount of the money "liquid" for qualified medical expenses. And the rest of it just invest


?

If you’re planning on using is immediately for medical expenses, I’d just keep the whole thing in cash. What most young people do, though, is use it as another tax free investment vehicle, and don’t spend any of it until social security age.

IIRC you can actually save medical expense receipts and get them reimbursed *many years later*. I keep a big folder on my computer for exactly this purpose. I put all funds in investments and never run my medical expenses through it (but have the option to do this later on with my old receipts, after the principal has grown). Personally I would not use HSA for same-year medical expenses as it is way more powerful to let it compound in investments

RE taxability - my accountant in CA always told me that none of his clients reported the HSA contributions and growth. However, I felt like knowingly choosing not to pay a tax (even though it was small and not well enforced) was a bad idea and asked him to always include my HSA on my tax return for the state of CA even though he felt confident it didn't matter. This ended up being a very nominal amount but I slept better for it. After a few years I moved to texas and no longer have to report it. Personally I would pay the tax even if others choose not to - committing tax fraud to save a few bucks seems like a bad idea.

[quantAndHold]

Thank you everyone for the information so far. Extremely helpful!

So for HSA's I guess I should keep a certain amount of the money "liquid" for qualified medical expenses. And the rest of it just invest


?

If you’re planning on using is immediately for medical expenses, I’d just keep the whole thing in cash. What most young people do, though, is use it as another tax free investment vehicle, and don’t spend any of it until social security age.

IIRC you can actually save medical expense receipts and get them reimbursed *many years later*. I keep a big folder on my computer for exactly this purpose. I put all funds in investments and never run my medical expenses through it (but have the option to do this later on with my old receipts, after the principal has grown). Personally I would not use HSA for same-year medical expenses as it is way more powerful to let it compound in investments

This is correct. If and when I ever need the money, I have a file folder with enough bills and receipts to just withdraw the whole thing at once. But in the meantime, it's growing like a Roth, except that the contributions are also deductible.

RE taxability - my accountant in CA always told me that none of his clients reported the HSA contributions and growth. However, I felt like knowingly choosing not to pay a tax (even though it was small and not well enforced) was a bad idea and asked him to always include my HSA on my tax return for the state of CA even though he felt confident it didn't matter. This ended up being a very nominal amount but I slept better for it. After a few years I moved to texas and no longer have to report it. Personally I would pay the tax even if others choose not to - committing tax fraud to save a few bucks seems like a bad idea.

I'm sure. Even when I had taxable investments in the HSA the amount of tax was negligible, in part because the HSA is such a small part of my overall portfolio. I switched to a federal bond fund when we moved back to CA after a sojourn in WA, because it's one less thing to have to think about every year.

[KiwiBobs]

I put my HSA all into BRK-B. No dividend income to report.

[DVMResident]

Just use the HSA for a portion of your bond allocation to avoid state taxes: munis and t-notes.

It’s not a big deal, but the HSA in CA is less attractive than other states.

[cacophony]

Quant:

My experience is that I get what I need for CA tax reporting in teeny tiny print at the bottom of my last HSA statement for the year. Like 6 point font that I would never be able to read without my glasses.

Where do you have your HSA? I have not seen that on my Fidelity account.

My Payflex HSA has the yearly dividend and capital gain summary on my Dec 31st statement.

[sailaway]

Quant:

My experience is that I get what I need for CA tax reporting in teeny tiny print at the bottom of my last HSA statement for the year. Like 6 point font that I would never be able to read without my glasses.

Where do you have your HSA? I have not seen that on my Fidelity account.

My Payflex HSA has the yearly dividend and capital gain summary on my Dec 31st statement.

Optum has started sending a year end statement, but we originally had to add up the quarterly statements.

[mikep]

I use Fidelity HSA to hold a portion of my TIPS fund since CA doesn’t tax federal government interest, and use the treasury MM for what I want to keep in cash for my health spending. I TLH’d this year with the bond market drop too. If CA wants to keep taxing it I’ll share my capital loss with them as well.

Stick with tax efficient stock index funds and/or federal government interest and you’ll be fine.

[stocknoob4111]

A good use of HSA funds later in life is to pay Medicare premiums which would qualify as tax free withdrawal.

[evelynmanley]

My HSA is at HSABank. I'm in CA. I've never invested the funds because I want them available in case of emergency. Both of my kids have co-signer credit cards associated with this account, so they can easily pay any medical expenses since they are my healthcare POAs. I want to make things as easy as possible for them and for my finances in case I'm incapacitated. I always pay out of pocket for all my medical expenses under $1,000 and keep detailed documentation for the IRS in case I decide to reimburse myself later for those expenses, which creates no tax event. Since I don't invest the funds, I make basically no interest, but for me it's worth it to know the funds are instantly available if needed. My HSA balance is only 25K, so it was an easy decision.

[mjg]

My HSA is at HSABank. I'm in CA. I've never invested the funds because I want them available in case of emergency. Both of my kids have co-signer credit cards associated with this account, so they can easily pay any medical expenses since they are my healthcare POAs. I want to make things as easy as possible for them and for my finances in case I'm incapacitated. I always pay out of pocket for all my medical expenses under $1,000 and keep detailed documentation for the IRS in case I decide to reimburse myself later for those expenses, which creates no tax event. Since I don't invest the funds, I make basically no interest, but for me it's worth it to know the funds are instantly available if needed. My HSA balance is only 25K, so it was an easy decision.

I was very similar to you until earlier this year. CA, about 23K in a Health Equity HSA from my employer before retiring last year. Getting about 0.2% in interest. Moved it to a free HSA account at Fidelity earlier this year. Earning about 4.97% interest in their "cash" settlement account where money gets transferred out by me once a month for prior HSA eligible expenses.

So, bottom line, you are leaving behind about $1250 a year if you moved to Fidelity with no liquidity loss.

[evelynmanley]

My HSA is at HSABank. I'm in CA. I've never invested the funds because I want them available in case of emergency. Both of my kids have co-signer credit cards associated with this account, so they can easily pay any medical expenses since they are my healthcare POAs. I want to make things as easy as possible for them and for my finances in case I'm incapacitated. I always pay out of pocket for all my medical expenses under $1,000 and keep detailed documentation for the IRS in case I decide to reimburse myself later for those expenses, which creates no tax event. Since I don't invest the funds, I make basically no interest, but for me it's worth it to know the funds are instantly available if needed. My HSA balance is only 25K, so it was an easy decision.

I was very similar to you until earlier this year. CA, about 23K in a Health Equity HSA from my employer before retiring last year. Getting about 0.2% in interest. Moved it to a free HSA account at Fidelity earlier this year. Earning about 4.97% interest in their "cash" settlement account where money gets transferred out by me once a month for prior HSA eligible expenses.

So, bottom line, you are leaving behind about $1250 a year if you moved to Fidelity with no liquidity loss.

Thank you for sharing that information! Is that cash settlement account a money market fund?

[Dabeachi]

Preparing tax returns on a California HSA is a pain in the ass. California expects you to report income on your tax return but all brokers that I am aware of do not break down the account income or give you a 1099. Even if the income is, for example, treasury interest and not taxable by the state, you have to report it and then designate it as not taxable. If you buy and sell stock or mutual funds you have to keep track of the basis and enter any gains or losses to your state tax return.

If you move to another state and then withdraw money from your HSA, it is unclear to me whether the new state will tax the withdrawal.

My experience is that I get what I need for CA tax reporting in teeny tiny print at the bottom of my last HSA statement for the year. Like 6 point font that I would never be able to read without my glasses.

The thing with treasury interest is that while it might be technically required to report it, in practice, the state is not going to come after you for not reporting something that’s going to net them $0. The only reason I would go to the trouble is if I had a mix of taxable and non-taxable interest.

How does one claim any gains on the CA tax return? This is my first year maxing out HSA contributions and investing it. I've looked at prior years CA taxes, but I didn't see where that income gets reported. I see Fidelity lists it on the Dec 31st statement. Where should this number have been reported? I have a CPA do my taxes, and most HSA questions are on the federal forms. I only saw one line on the CA tax forms ((schedule CA 540) asking for "employer HSA contributions." Is there some other form that should be filed?

[CFM300]

How does one claim any gains on the CA tax return?

Schedule CA (540) - California Adjustments. Going from memory here, but I think capital gains paid out by investments are reported on Line 3, and capital gains from sale of investments go on Line 7.

[grabiner]

How does one claim any gains on the CA tax return? This is my first year maxing out HSA contributions and investing it. I've looked at prior years CA taxes, but I didn't see where that income gets reported. I see Fidelity lists it on the Dec 31st statement. Where should this number have been reported? I have a CPA do my taxes, and most HSA questions are on the federal forms. I only saw one line on the CA tax forms ((schedule CA 540) asking for "employer HSA contributions." Is there some other form that should be filed?

It's not reported on a tax form from the brokerage, but you can find out what the income was from your brokerage statement. If you have a fund which paid $100 in dividends, then you will report $100 of dividend income taxable only by CA on your Schedule CA (or only $20 of dividends if that $100 was 80% from Treasury bonds).

(I have done this for years; I used to live in NJ, and I have filed CA or NJ non-resident taxes in some years in which I earned income in those states. I likewise have to keep track of my CA capital loss carryover; this is less than my federal carryover because I sold an ETF in the HSA for a capital gain.)

[bd7]

I just graduated residency and I landed myself a job in California as a K-1 Partner. I just applied for benefits and quickly signed up for an HSA account. However, after doing further research I am now seeing that California Taxes  HSA accounts. Can someone elaborate on these taxes? Does this even make an HSA worth it in California? and for those of you who have an HSA in california how do you invest or maximize the use of it?

Definitely worth it and the way I handle it is to put everything in Federal Gov debt that is not state taxable, therefore there are no taxes due to either the Feds or CA. You can use FDLXX for money you may need to use soon, Treasuries or GSE bonds for money you want to invest longer term, or as a previous poster wrote, for money you might withdraw later when you live in a different state, any investment that doesn't pay dividends like BRK/B. You need to have your HSA at Fidelity rather than whatever bank your employer uses because most of those have very limited investment options. You can roll it out periodically or just do away with the employer-sponsored HSA (unless they are contributing) and do it on your own. The only difference is the FICA/Medicare tax reduction you would get by doing it directly with your employer, but I'll assume you will be maxing out FICA so it would just be the very small Medicare portion.

[CletusCaddy]

Honestly. Why all this hand wringing for a few pennies?

VTI yields 1.5% taxable distributions annually. CA tax bracket for most of us is 9.3%

That’s 0.14% of tax cost incurred by holding VTI in CA HSA. And how much do people have in HSA relative to total portfolio?

Optimization can become unhealthy obsession…

[grabiner]

Honestly. Why all this hand wringing for a few pennies?

VTI yields 1.5% taxable distributions annually. CA tax bracket for most of us is 9.3%

That’s 0.14% of tax cost incurred by holding VTI in CA HSA.

Plus about 6% when you sell (depending on how much of the sale price is capital gain versus basis).

I don't recommend distorting your portfolio, but if Treasury bonds or TIPS fit your investment needs, you might as well hold them in the most tax-efficient place, which is the HSA.

[mjg]

My HSA is at HSABank. I'm in CA. I've never invested the funds because I want them available in case of emergency. Both of my kids have co-signer credit cards associated with this account, so they can easily pay any medical expenses since they are my healthcare POAs. I want to make things as easy as possible for them and for my finances in case I'm incapacitated. I always pay out of pocket for all my medical expenses under $1,000 and keep detailed documentation for the IRS in case I decide to reimburse myself later for those expenses, which creates no tax event. Since I don't invest the funds, I make basically no interest, but for me it's worth it to know the funds are instantly available if needed. My HSA balance is only 25K, so it was an easy decision.

I was very similar to you until earlier this year. CA, about 23K in a Health Equity HSA from my employer before retiring last year. Getting about 0.2% in interest. Moved it to a free HSA account at Fidelity earlier this year. Earning about 4.97% interest in their "cash" settlement account where money gets transferred out by me once a month for prior HSA eligible expenses.

So, bottom line, you are leaving behind about $1250 a year if you moved to Fidelity with no liquidity loss.

Thank you for sharing that information! Is that cash settlement account a money market fund?

You have two choices from what I recall for your "cash" settlement account. I am currently using SPRXX which is Fidelity Money Market. I just checked today and it's current 7 day yield is 5.05%.

[bd7]

Honestly. Why all this hand wringing for a few pennies?
Optimization can become unhealthy obsession…

What hand-wringing? It takes no longer to buy FDLXX than it does VTI. And with VTI (or BRK/B) when you have to cash out in the future to pay a medical expense, CA will tax all of your gains as ordinary income.

Also, it's not hand wringing to want to put your HSA in entirely risk-free investments. I consider it part of my EF, so I wouldn't be putting it in VTI regardless of the tax consequences. If you restrict your choice of investments to risk-free fixed income, Federal debt becomes the obvious choice.

[bd7]

You have two choices from what I recall for your "cash" settlement account. I am currently using SPRXX which is Fidelity Money Market. I just checked today and it's current 7 day yield is 5.05%.

You can manually move everything into FDLXX (CA tax free) shortly after deposits and it will auto-liquidate as needed if you move money out. My FDLXX amount shows up as an available cash balance.

[dual]

You have two choices from what I recall for your "cash" settlement account. I am currently using SPRXX which is Fidelity Money Market. I just checked today and it's current 7 day yield is 5.05%.

You can manually move everything into FDLXX (CA tax free) shortly after deposits and it will auto-liquidate as needed if you move money out. My FDLXX amount shows up as an available cash balance.

I am trying an experiment to bring the balance on my FDRXX core account to zero. So far, the website has not squawked. A T bill will autoroll in a couple of months and it will be interesting to see what happens. I think they will take the money from my FDLXX. The T bill face value will be deposited into FDRXX and the purchase price for the new tbill deducted. I will then manually transfer the balance of to FDLXX.

[mervinj7]

You have two choices from what I recall for your "cash" settlement account. I am currently using SPRXX which is Fidelity Money Market. I just checked today and it's current 7 day yield is 5.05%.

You can manually move everything into FDLXX (CA tax free) shortly after deposits and it will auto-liquidate as needed if you move money out. My FDLXX amount shows up as an available cash balance.

I am trying an experiment to bring the balance on my FDRXX core account to zero. So far, the website has not squawked. A T bill will autoroll in a couple of months and it will be interesting to see what happens. I think they will take the money from my FDLXX. The T bill face value will be deposited into FDRXX and the purchase price for the new tbill deducted. I will then manually transfer the balance of to FDLXX.

No need to manually transfer. Just setup an auto-transfer monthly for a number much larger than interest you expect each month. The transfer will automatically limit itself to what's left in your account.

[mikep]

Anyone holding TIPS or US treasury funds in a Fidelity HSA, which is ideal with the state tax treatment of federal interest income, should take a look to see if they can take a CA tax loss harvest with many bond funds near a 52 week low. What alternative investment would you suggest to hold for 30 days?